Kligman v. Minister of national revenue

Kligman v. Minister of national revenue
Court (s) Database
Federal Court Decisions
Date
2003-01-21
Neutral citation
2003 FCT 52
File numbers
T-203-01
Notes
Reported Decision
Decision Content
Federal Court Reports Kligman v. M.N.R. (T.D.) [2003] 3 F.C. 569
Date: 20030121
Neutral citation: 2003 FCT 52
OTTAWA, Ontario, this 21st day of January, 2003
Present: THE HONOURABLE MR. JUSTICE BEAUDRY
BETWEEN:
Docket T-203-01
SAM KLIGMAN
Applicant
and
MINISTER OF NATIONAL REVENUE
Respondent
Docket T-204-01
ALLAN SANDLER
Applicant
and
MINISTER OF NATIONAL REVENUE
Respondent
Docket T-205-01
SNAPSHOT THEATRICAL PRODUCTIONS
Applicant
and
MINISTER OF NATIONAL REVENUE
Respondent
Docket T-206-01
MODERN WOOD FABRICATORS (MWF) INC.
Applicant
and
MINISTER OF NATIONAL REVENUE
Respondent
Docket T-207-01
LES PLASTIQUES ALGAR LTÉE
Applicant
and
MINISTER OF NATIONAL REVENUE
Respondent
REASONS FOR ORDER AND ORDER
[1] This is an application for judicial review challenging the requirement to provide information issued by Canada Customs and Revenue Agency ("CCRA"), an agency operating under the supervision and control of the Minister of National Revenue (the "respondent"). The applicants are Sam Kligman ("Kligman"), Allan Sandler ("Sandler"), Snapshot Theatrical Productions ("Snapshot"), Modern Wood Fabricators (MWF) Inc. ("MWF") and Les Plastiques Algar Ltée ("Algar"). The five applicants, when referred to as a group, shall be referred to as the "applicants".
[2] The applications of the five applicants were originally filed separately and assigned individual file numbers. The applicants and the respondent agreed that the five applications should be consolidated into a single application. The order of Tremblay-Lamer J., dated February 13, 2001, provides assent to this consolidation and to the condition that the information and documents set out in the requirements to provide information be released to the respondent within 30 days of the final disposition of this judicial review.
[3] Some of the materials in the files related to this hearing are in French; notably the affidavit of André Faribault ("Faribault") of the Special Investigations Division ("SI") of the Respondent, and the transcript of his cross-examination on that affidavit. However, the Memoranda of Fact and Law prepared by the applicants and the respondent, respectively, are written in English. Accordingly, these reasons have been prepared in English.
FACTS
[4] In October, 1999, the SI sent an informal requirement to Algar, requesting various documents and information. The requested materials included charitable donation receipts for the taxation years 1994 to 1998 inclusive. The request was sent by SI agent George Holz, who had been working on the file at the time.
[5] In November 1999, CCRA informed Kligman that the file had been suspended, then informed him in September 2000, that CCRA had confirmed that its investigation of the Rabbinical College of Montreal regarding charitable donations was completed and that no criminal prosecution would be recommended against that organization. CCRA then informed Algar in a letter dated October 18, 2000, that its file had been reassigned to Faribault.
[6] The letters which are the subject of the judicial review in the present case are the letters sent on January 12, 2001, to each of the five applicants (Applicants' Record, tab 3 through tab 7).
[7] The letters were titled Requirement to Provide Information and Documents (the "Requirement" or "Requirements"). The letters to Algar, Snapshot and MWF included requirements made pursuant to paragraph 231.2(1)(b) of the Income Tax Act (R.S.C. 1985, c. 1 (5th Supp.) (the "Act", sometimes referred to as "ITA", as that is how it is cited in the pleadings of the parties. The letters to Kligman and Sandler made reference to paragraphs 231.2(1)(a) and (b) of the ITA. CCRA stated that it required information from the applicants with respect to donations that they had made to four charitable organizations: Rabbinical College of Montreal, Yeshiva Oir Hochaim, L'Association Gimilis Chasodim Keren Chava B'Nei Levi, and Les Amis Canadiens des Institutions de la Terre Sainte.
[8] CCRA required information for various periods between 1992 to 1999, inclusive. The relevant period differed from applicant to applicant. The information required of Kligman and Sandler consisted of account numbers (and the identification of the banks and branches at which the accounts were held), from which cheques were drawn to pay the donations, and the cancelled cheques related to these donations.
[9] The material requested from Algar, MWF and Snapshot included cancelled cheques, bank statements and donation receipts related to the donations to the organizations mentioned in the letters. Also requested were the cash disbursements journal, general ledger, adjusting entries and trial balance for the period specified in the letter. These are elements of the bookkeeping of the company.
[10] Each of the letters concluded by stating that:
Your attention is directed to subsections 238 (1) and (2) of the Income Tax Act for default in complying with this requirement.
[11] The applicants are challenging this requirement, claiming that it is an illegal seizure.
[12] Following the hearing of this matter but before this judgment was released, the Supreme Court of Canada issued decisions in two cases which also dealt with the disclosure requirements of the Act. These cases are R v. Jarvis, 2002 SCC 73, [2002] S.C.J. No. 76 (QL) and R. v. Ling, 2002 SCC 74, [2002] S.C.J. No. 75 (QL).
[13] On December 2, 2002, I granted the applicants' motion to file amended pleadings. In my order granting this motion, I also provided for the respondent to file amended pleadings of its own in response by December 6, 2002, which were filed.
RELEVANT STATUTORY PROVISIONS
Income Tax Act
[14] Sections 231.1, 231.2, subsections 238 (1) and (2) and subsections 239 (1) and (1.1) of the Act read as follows:
231.1
231.1. (1) An authorized person may, at all reasonable times, for any purpose related to the administration or enforcement of this Act,
(a) inspect, audit or examine the books and records of a taxpayer and any document of the taxpayer or of any other person that relates or may relate to the information that is or should be in the books or records of the taxpayer or to any amount payable by the taxpayer under this Act, and
(b) examine property in an inventory of a taxpayer and any property or process of, or matter relating to, the taxpayer or any other person, an examination of which may assist the authorized person in determining the accuracy of the inventory of the taxpayer or in ascertaining the information that is or should be in the books or records of the taxpayer or any amount payable by the taxpayer under this Act,
and for those purposes the authorized person may
(c) subject to subsection 231.1(2), enter into any premises or place where any business is carried on, any property is kept, anything is done in connection with any business or any books or records are or should be kept, and
(d) require the owner or manager of the property or business and any other person on the premises or place to give the authorized person all reasonable assistance and to answer all proper questions relating to the administration or enforcement of this Act and, for that purpose, require the owner or manager to attend at the premises or place with the authorized person.
(2) The Minister shall not impose on any person (in this section referred to as a "third party") a requirement under subsection 231.2(1) to provide information or any document relating to one or more unnamed persons unless the Minister first obtains the authorization of a judge under subsection 231.2(3).
(3) Where, on ex parte application by the Minister, a judge is satisfied by information on oath that
(a) there are reasonable grounds to believe that a dwelling-house is a premises or place referred to in paragraph 231.1(1)(c),
(b) entry into the dwelling-house is necessary for any purpose relating to the administration or enforcement of this Act, and
(c) entry into the dwelling-house has been, or there are reasonable grounds to believe that entry will be, refused,
the judge may issue a warrant authorizing an authorized person to enter the dwelling-house subject to such conditions as are specified in the warrant but, where the judge is not satisfied that entry into the dwelling-house is necessary for any purpose relating to the administration or enforcement of this Act, the judge may
(d) order the occupant of the dwelling-house to provide to an authorized person reasonable access to any document or property that is or should be kept in the dwelling-house, and
(e) make such other order as is appropriate in the circumstances to carry out the purposes of this Act,
to the extent that access was or may be expected to be refused and that the document or property is or may be expected to be kept in the dwelling-house.
231.1. (1) Une personne autorisée peut, à tout moment raisonnable, pour l'application et l'exécution de la présente loi, à la fois:
a) inspecter, vérifier ou examiner les livres et registres d'un contribuable ainsi que tous documents du contribuable ou d'une autre personne qui se rapportent ou peuvent se rapporter soit aux renseignements qui figurent dans les livres ou registres du contribuable ou qui devraient y figurer, soit à tout montant payable par le contribuable en vertu de la présente loi;
b) examiner les biens à porter à l'inventaire d'un contribuable, ainsi que tout bien ou tout procédé du contribuable ou d'une autre personne ou toute matière concernant l'un ou l'autre dont l'examen peut aider la personne autorisée à établir l'exactitude de l'inventaire du contribuable ou à contrôler soit les renseignements qui figurent dans les livres ou registres du contribuable ou qui devraient y figurer, soit tout montant payable par le contribuable en vertu de la présente loi;
à ces fins, la personne autorisée peut:
c) sous réserve du paragraphe (2), pénétrer dans un lieu où est exploitée une entreprise, est gardé un bien, est faite une chose en rapport avec une entreprise ou sont tenus ou devraient l'être des livres ou registres;
d) requérir le propriétaire, ou la personne ayant la gestion, du bien ou de l'entreprise ainsi que toute autre personne présente sur les lieux de lui fournir toute l'aide raisonnable et de répondre à toutes les questions pertinentes à l'application et l'exécution de la présente loi et, à cette fin, requérir le propriétaire, ou la personne ayant la gestion, de l'accompagner sur les lieux.
(2) Lorsque le lieu mentionné à l'alinéa (1)c) est une maison d'habitation, une personne autorisée ne peut y pénétrer sans la permission de l'occupant, à moins d'y être autorisée par un mandat décerné en vertu du paragraphe (3).
(3) Sur requête ex parte du ministre, le juge saisi peut décerner un mandat qui autorise une personne autorisée à pénétrer dans une maison d'habitation aux conditions précisées dans le mandat, s'il est convaincu, sur dénonciation sous serment, de ce qui suit:
a) il existe des motifs raisonnables de croire que la maison d'habitation est un lieu mentionné à l'alinéa (1)c);
b) il est nécessaire d'y pénétrer pour l'application ou l'exécution de la présente loi;
c) un refus d'y pénétrer a été opposé, ou il existe des motifs raisonnables de croire qu'un tel refus sera opposé.
Dans la mesure où un refus de pénétrer dans la maison d'habitation a été opposé ou pourrait l'être et où des documents ou biens sont gardés dans la maison d'habitation ou pourraient l'être, le juge qui n'est pas convaincu qu'il est nécessaire de pénétrer dans la maison d'habitation pour l'application ou l'exécution de la présente loi peut ordonner à l'occupant de la maison d'habitation de permettre à une personne autorisée d'avoir raisonnablement accès à tous documents ou biens qui sont gardés dans la maison d'habitation ou devraient y être gardés et rendre tout autre ordonnance indiquée en l'espèce pour l'application de la présente loi.
231.2(1)
231.2. (1) Notwithstanding any other provision of this Act, the Minister may, subject to subsection (2), for any purpose related to the administration or enforcement of this Act, including the collection of any amount payable under this Act by any person, by notice served personally or by registered or certified mail, require that any person provide, within such reasonable time as is stipulated in the notice,
(a) any information or additional information, including a return of income or a supplementary return; or
(b) any document.
231.2. (1) Malgré les autres dispositions de la présente loi, le ministre peut, sous réserve du paragraphe (2) et, pour l'application et l'exécution de la présente loi, y compris la perception d'un montant payable par une personne en vertu de la présente loi, par avis signifié à personne ou envoyé par courrier recommandé ou certifié, exiger d'une personne, dans le délai raisonnable que précise l'avis:
a) qu'elle fournisse tout renseignement ou tout renseignement supplémentaire, y compris une déclaration de revenu ou une déclaration supplémentaire;
b) qu'elle produise des documents.
S. 238 (1) and (2)
(1) Every person who has failed to file or make a return as and when required by or under this Act or a regulation or who has failed to comply with subsection 116(3), 127(3.1) or 127(3.2), 147.1(7) or 153(1), any of sections 230 to 232 or a regulation made under subsection 147.1(18) or with an order made under subsection 238(2) is guilty of an offence and, in addition to any penalty otherwise provided, is liable on summary conviction to
(a) a fine of not less than $1,000 and not more than $25,000; or
(b) both the fine described in paragraph 238(1)(a) and imprisonment for a term not exceeding 12 months.
(2) Where a person has been convicted by a court of an offence under subsection 238(1) for a failure to comply with a provision of this Act or a regulation, the court may make such order as it deems proper in order to enforce compliance with the provision.
(1) La personne qui ne produit ou ne présente pas ou ne remplit pas une déclaration de la manière et dans le délai prévus à la présente loi ou à son règlement ou qui contrevient au paragraphe 116(3), 127(3.1) ou (3.2), 147.1(7) ou 153(1) ou à l'un des articles 230 à 232 ou à une disposition réglementaire prise en vertu du paragraphe 147.1(18) ou encore qui contrevient à une ordonnance rendue en application du paragraphe (2) commet une infraction et encourt, sur déclaration de culpabilité par procédure sommaire et outre toute pénalité prévue par ailleurs:
a) soit une amende de 1 000 $ à 25 000 $;
b) soit une telle amende et un emprisonnement maximal de 12 mois.
(2) Le tribunal qui déclare une personne coupable d'une infraction prévue au paragraphe (1) peut rendre toute ordonnance qu'il estime indiquée pour qu'il soit remédié au défaut visé par l'infraction.
239 (1) and (1.1)
(1) Every person who has
(a) made, or participated in, assented to or acquiesced in the making of, false or deceptive statements in a return, certificate, statement or answer filed or made as required by or under this Act or a regulation,
(b) to evade payment of a tax imposed by this Act, destroyed, altered, mutilated, secreted or otherwise disposed of the records or books of account of a taxpayer,
(1) Toute personne qui, selon le cas:
a) a fait des déclarations fausses ou trompeuses, ou a participé, consenti ou acquiescé à leur énonciation dans une déclaration, un certificat, un état ou une réponse produits, présentés ou faits en vertu de la présente loi ou de son règlement;
b) a, pour éluder le paiement d'un impôt établi par la présente loi, détruit, altéré, mutilé, caché les registres ou livres de comptes d'un contribuable ou en a disposé autrement;
(c) made, or assented to or acquiesced in the making of, false or deceptive entries, or omitted, or assented to or acquiesced in the omission, to enter a material particular, in records or books of account of a taxpayer,
(d) wilfully, in any manner, evaded or attempted to evade compliance with this Act or payment of taxes imposed by this Act, or
(e) conspired with any person to commit an offence described in paragraphs 239(1)(a) to 239(1)(d),
is guilty of an offence and, in addition to any penalty otherwise provided, is liable on summary conviction to
(f) a fine of not less than 50%, and not more than 200%, of the amount of the tax that was sought to be evaded, or
(g) both the fine described in paragraph 239(1)(f) and imprisonment for a term not exceeding 2 years.
c) a fait des inscriptions fausses ou trompeuses, ou a consenti ou acquiescé à leur accomplissement, ou a omis, ou a consenti ou acquiescé à l'omission d'inscrire un détail important dans les registres ou livres de comptes d'un contribuable;
d) a, volontairement, de quelque manière, éludé ou tenté d'éluder l'observation de la présente loi ou le paiement d'un impôt établi en vertu de cette loi;
e) a conspiré avec une personne pour commettre une infraction visée aux alinéas a) à d),
commet une infraction et, en plus de toute autre pénalité prévue par ailleurs, encourt, sur déclaration de culpabilité par procédure sommaire:
f) soit une amende de 50 % à 200 % de
l'impôt que cette personne a tenté d'éluder;
g) soit à la fois l'amende prévue à l'alinéa f) et un emprisonnement d'au plus 2 ans.
(1.1) Every person who obtains or claims a refund or credit under this Act to which the person or any other person is not entitled or obtains or claims a refund or credit under this Act in an amount that is greater than the amount to which the person or other person is entitled
(a) by making, or participating in, assenting to or acquiescing in the making of, a false or deceptive statement in a return, certificate, statement or answer filed or made under this Act or a regulation,
(b) by destroying, altering, mutilating, hiding or otherwise disposing of a record or book of account of the person or other person,
(c) by making, or assenting to or acquiescing in the making of, a false or deceptive entry in a record or book of account of the person or other person,
(d) by omitting, or assenting to or acquiescing in an omission to enter a material particular in a record or book of account of the person or other person,
(e) wilfully in any manner, or
(f) by conspiring with any person to commit any offence under this subsection,
is guilty of an offence and, in addition to any penalty otherwise provided, is liable on summary conviction to
(1.1) Commet une infraction toute personne qui, en vertu de la présente loi, obtient ou demande un remboursement ou crédit auquel elle ou une autre personne n'a pas droit, ou un remboursement ou un crédit d'un montant supérieur à celui auquel elle ou une autre personne a droit, du fait que, selon le cas:
a) elle a fait des déclarations fausses ou trompeuses, ou a participé, consenti ou acquiescé à leur énonciation, dans une déclaration, un certificat, un état ou une réponse produit, présenté ou fait en vertu de la présente loi ou de son règlement,
b) elle a détruit, altéré, mutilé ou caché ses registres ou livres de comptes, ou ceux de l'autre personne, ou en a disposé autrement,
c) elle a fait des inscriptions fausses ou trompeuses, ou a consenti ou acquiescé à leur accomplissement, dans ses registres ou livres de comptes ou ceux de l'autre personne,
d) elle a omis, ou a consenti ou acquiescé à l'omission, d'inscrire un détail important dans ses registres ou livres de comptes ou ceux de l'autre personne,
e) elle a agi volontairement de quelque manière que ce soit,
f) elle a conspiré avec une personne pour commettre une infraction visée au présent paragraphe.
En plus de toute autre pénalité prévue par ailleurs, cette personne encourt, sur déclaration de culpabilité par procédure sommaire:
(g) a fine of not less than 50% and not more than 200% of the amount by which the amount of the refund or credit obtained or claimed exceeds the amount, if any, of the refund or credit to which the person or other person, as the case may be, is entitled, or
(h) both the fine described in paragraph 239(1.1)(g) and imprisonment for a term not exceeding 2 years.
g) soit une amende de 50 % à 200 % de l'excédent du montant du remboursement ou du crédit obtenu ou demandé sur le montant auquel elle ou l'autre personne, selon le cas, a droit;
h) soit à la fois l'amende prévue à l'alinéa g) et un emprisonnement d'au plus 2 ans.
[15] The Canadian Charter of Rights and Freedoms, ss. 7, 8, 24, Part I of the Constitution Act, 1982, Canada Act 1982 (U.K.), c. 11, (the "Charter") reads as follows:
7. Everyone has the right to life, liberty and security of the person and the right not to be deprived thereof except in accordance with the principles of fundamental justice.
8. Everyone has the right to be secure against unreasonable search or seizure.
24. (1) Anyone whose rights or freedoms, as guaranteed by this Charter, have been infringed or denied may apply to a court of competent jurisdiction to obtain such remedy as the court considers appropriate and just in the circumstances.
(2) Where, in proceedings under subsection (1), a court concludes that evidence was obtained in a manner that infringed or denied any rights or freedoms guaranteed by this Charter, the evidence shall be excluded if it is established that, having regard to all the circumstances, the admission of it in the proceedings would bring the administration of justice into disrepute.
7. Chacun a droit à la vie, à la liberté et à la sécurité de sa personne; il ne peut être porté atteinte à ce droit qu'en conformité avec les principes de justice fondamentale.
8. Chacun a droit à la protection contre les fouilles, les perquisitions ou les saisies abusives.
24. (1) Toute personne, victime de violation ou de négation des droits ou libertés qui lui sont garantis par la présente charte, peut s'adresser à un tribunal compétent pour obtenir la réparation que le tribunal estime convenable et juste eu égard aux circonstances.
ISSUES
[16] Does the Requirement constitute a breach of sections 7 and 8 of the Charter?
[17] If the Requirement does violate the Charter, should an order be issued pursuant to subsection 24(1) of the Charter quashing the Requirement?
SUBMISSIONS
Section 7 and 8 - Applicants
[18] The Requirement was issued to each of the applicants in the context of a criminal investigation, not simply an administrative proceeding. The applicants referred on several occasions in their statement of facts (Amended Memorandum of Fact and Law of the applicants, filed on August 19, 2002) to the cross-examination of Faribault on his affidavit.
[19] The applicants indicate that Faribault's answers reveal SI to be a division which executes criminal investigation programs to investigate, penalize and recommend prosecution of taxpayers for deliberate evasion practices. In this case, Faribault's responsibility was to investigate the applicants for the purpose of gathering evidence of a criminal offence and to take steps for the prosecution of the applicants under s. 239 of the Act.
[20] The respondent did not apply for a search warrant, since they did not have reasonable and probable grounds to believe that an offence had been committed. Instead, they issued the Requirement to obtain a search of the documents of the applicants without a warrant. The lack of a judicial authorization prior to issuing the Requirement, and the failure of the respondent to specify whether copies or originals of the documents mentioned in the Requirement were wanted are also facts that are pertinent to the argument that the Requirement violates s. 8 of the Charter.
[21] The Supreme Court of Canada stated in R. v. McKinlay Transport Ltd., [1990] 1 S.C.R. 627, that a requirement issued under the predecessor of s. 231.2 was a seizure. The Court did not find that it was an unreasonable seizure of the kind that would violate s. 8; however, that case is distinguishable from the present case. In McKinlay, supra, the requirement was issued in the context of a purely regulatory matter, whereas this Requirement has been issued in the context of an investigation where criminal charges are envisioned.
[22] Létourneau, J.A. stated in Bisaillon et al v. Ministre du Revenu national et al (1999), 251 N.R. 225 (F.C.A.), while dealing with an interlocutory matter, then in Bisaillon v. Ministre du Revenu national et al (1999), 264 N.R. 21 (F.C.A.), that s. 231.2 was not to be used to gather evidence for a criminal proceeding. Therefore, given the evidence in the present case, s. 231.2 cannot be used to gather evidence against the applicants for the purpose toward which Faribault is working.
[23] The cross-examination of Faribault revealed that the primary purpose in issuing the Requirements was to gather evidence in preparation for a prosecution of the applicants under s. 239 of the Act. In Knox Contracting Ltd. v. Canada, [1990] 2 S.C.R. 338, Cory J. firmly concluded that violation of s. 239 is a criminal offence.
[24] In Hunter v. Southam Inc., [1984] 2 S.C.R. 145, it was noted that seizures made without prior judicial authorization, such as a warrant, were deemed to be unreasonable. The Requirements were issued without prior judicial authorization, and it is up to the respondent to rebut the presumption that they are unreasonable.
[25] The applicants submit that the Requirements were unreasonable on several grounds. In Thomson Newspapers v. Canada (Director of Investigation and Research, Restrictive Trade Practices Commission), [1990] 1 S.C.R. 425, the privacy interest in particular documents and the reasonable expectation of privacy that one could have, were discussed by La Forest J. In the present case, a high expectation of privacy exists, particularly in light of the criminal nature of the investigation. In addition, the high expectation of privacy to which the applicants claim to be entitled is supported by a finding with respect to bank records in R. v. Dial Drug Stores Ltd. (2001), 52 O.R. (3d) 367 (Ont C.J.).
[26] If prior judicial authorization is not obtained, the seizure is not valid, and cannot be made valid by asking a court to validate the search after it has taken place. So said the Supreme Court of Canada in Southam, supra, and R. v. Dyment, [1988] 2 S.C.R. 417 and the Federal Court of Appeal in Canada (Minister of National Revenue) v. Kruger Inc., [1984] 2 F.C. 535.
[27] The respondent used s. 231.2 to circumvent the requirement of prior judicial authorization that s. 8 imposes. The respondent knew that it could not obtain such authorization because it did not have reasonable and probable grounds to obtain that authorization. They are therefore using s. 231.2 of the Act to do indirectly what they cannot do directly to get evidence for a charge under s. 239. In R. v. Norway Insulation Inc., (1995) 23 O.R. (3d) 432 (Ont. Gen. Div.), the Court noted that the provision permitting the issuance of requirements was meant to assist in audits to ensure compliance with the Act, not as a tool to gather evidence for a criminal prosecution.
[28] The respondent admitted, through the cross-examination of Faribault, that the Requirements were vague and imprecise with respect to what was needed. This demonstrates the unreasonableness of the requirements and the need for prior judicial scrutiny. The circumstances in the present case do not justify the issuance of the requirement without prior judicial authorization. The situation is not urgent. Therefore, the respondent cannot rebut the presumption of unreasonableness.
[29] The applicants understand that the respondent sees Del Zotto v. Canada, [1999] 1 S.C.R. 3, rev'g [1997] 3 F.C. 40 (F.C.A.) [hereinafter "Del Zotto (S.C.C.)"] as approving the use of regulatory investigation provisions of the Act even when investigating criminal or quasi-criminal offences.
[30] However, the ruling in R. v. Saplys (1999), 132 C.C.C. (3d) 515 (Ont. Gen. Div.) suggests that Del Zotto (S.C.C.), does not suggest that a regulatory audit can be conducted to further a criminal investigation without engaging Charter rights. The applicants distinguish Del Zotto (S.C.C.) from the present case. They note that in Del Zotto (S.C.C.), a subpoena duces tecum had been issued to someone other than the taxpayer whose affairs were in question. In the present case, the applicants received Requirement letters addressed directly to them. The applicant cited further jurisprudence supporting this point of view.
[31] The applicant cites passages from Dyment, supra and Thomson, supra, in support of its argument that the presumption of unreasonableness is not rebutted by the absence of physical intrusion at a home or place of business. In addition, R. v. Gorenko, [1997] A.Q. No. 3206 (QL) (Que. Sup. Ct., appeal to Q.C.A. dismissed) does not support the respondent's position because in that case s. 231.1 of the Act was used in connection with a regulatory audit conducted in good faith. Additionally, in Gorenko, supra, information was gathered from a third party, not the taxpayer himself.
[32] In the Amended Memorandum of Fact and Law which were filed December 2, 2002 upon my order, the applicants noted that the Supreme Court in Jarvis, supra, held that where the predominant purpose of an inquiry is to conduct an investigation aimed at criminal conduct, the full panoply of Charter rights are engaged and the use of the requirements under s. 231.2 violate the Charter rights of taxpayers.
[33] The Court also confirmed this in Ling, supra, heard and decided by the Supreme Court at the same time. CCRA agents must warn taxpayers that they are under investigation for prosecution under s. 239. Otherwise, evidence gathered after the criminal investigation is found to have begun and which is found to have been obtained without such warning may be excluded.
[34] The evidence confirms that the respondent was carrying out a determination of penal liability. A sample of the testimony of Faribault on his examination for discovery bears this out. Accordingly, Charter protections are engaged and the requirement powers of s. 231.1 were not available to the respondent.
[35] The applicant maintains the arguments stated in its pre-hearing pleadings that the Requirements constitute a seizure as defined in s. 8 of the Charter, and that this seizure is unreasonable in the circumstances. They continue to cite McKinlay but add that Jarvis confirms that not all forms of search and seizure under the ITA will be valid. The need for safeguards of the individual rights of taxpayers continues to be proportional to the level of intrusion into the privacy interest of the individual.
Sections 7 and 8 - Respondent
[36] The respondent did have reasonable and probable grounds at the time at which the Requirements were issued to obtain a warrant. He knew that two registered charities had been investigated for falsely issuing tax receipts; one of these charities pleaded guilty; the other, Collège Rabbinique de Montréal (Montreal Rabbinical College), was cleared of the charges. He also knew that the applicants did not claim donations in respect of the charity against whom a conviction under s. 239 was registered, namely "Construit toujours avec Bonté", but did claim such deductions in respect of donations to the Montreal Rabbinical College. It is in this framework of facts that Faribault knew or did not know that the reasonable and probable grounds existed.
[37] The Supreme Court of Canada held in R. v. Collins, [1987] 1 S.C.R. 265, that the applicants have the burden of convincing the Court, on a balance of probabilities, that their Charter rights were breached.
[38] The Minister's two arguments under s. 8 are the reasonableness of the seizures by letters of requirement in the course of a tax evasion investigation and the question of whether the Requirements are inherently vague or imprecise.
[39] The respondent discusses McKinlay, and Thomson, which were released concurrently by the Supreme Court of Canada. In McKinlay, Wilson J. noted that although the power to compel production of documents by a requirement letter was a seizure within the meaning of s. 8, it did not constitute an unreasonable seizure. The nature of our tax system, which functions based on self-assessment, requires that taxation authorities need wide powers of supervision, which allow them to review the returns and records of a taxpayer whether or not there are reasonable grounds to believe that the Act has been violated.
[40] In Thomson, Wilson J. expressed her dissenting view that the subpoena in that case violated the Charter because it required documents in the context of a violation of competition law, which she considered a criminal investigation. However, she was of the view the reasonableness of the requirement to produce documents in McKinlay was supported by the vulnerability of the self-assessment scheme to abuse and the need to permit the investigation of such conduct.
[41] In addition, La Forest, L'Heureux-Dubé and Sopinka JJ. wrote brief concurring reasons in McKinlay and, unlike Wilson J., held the view that s. 8 was not violated in Thomson.
[42] In a tax case such as the present case, the reasoning presented in the above cases should apply because the investigative powers laid out in the ITA serve a dual purpose; namely, they allow for the investigation of a tax evasion offence as well as a tax assessment on a civil basis. On the other hand, the competition law statute in Thomson was purely penal in nature, and the evidence gathered in Thomson was sought for the sole purpose of determining whether an offence under the Combines Investigation Act (now the Competition Act, R.S. 1985, c. C-34), had been committed.
[43] In the period that followed, two contradictory lines of cases have developed. Some courts have taken the view that once a taxpayer is suspected of tax evasion offences, CCRA is considered to have begun a criminal investigation and can no longer use s. 231.1 to examine books and records, order document production under s. 231.2, or hold an inquiry pursuant to s. 231.4. Section 8 applies in full and prior authorization is needed, without variation from the prior authorization criteria from Southam.
[44] The other line of cases holds that search warrants must be obtained when reasonable and probable grounds to believe that a tax evasion offence has been committed are present. This also precludes use of the sections cited in the previous paragraph.
[45] The respondent submits that both of these lines of cases were wrongly decided as the Courts that decided them did not consider s. 8 rights in the proper context. Many of the cases did not identify the person's expectations of privacy under the regulatory scheme in question, or failed to give sufficient weight to the low degree of intrusiveness of the mechanism provided by statute for the gathering of evidence. The decision of Strayer J.A. in Del Zotto v. Canada (Minister of National Revenue), [1997] 3 F.C. 40 (C.A.) [hereinafter called "Del Zotto (F.C.A.)"] is highlighted for correctly considering such factors. The respondent goes on to note the factors that should be considered in the case at bar.
[46] The first of these factors is the nature and purpose of the Act. It is a regulatory statute that governs the collection of the most important source of the operating revenue of the federal government. The self-assessment nature of the tax system requires honest and full disclosure, and broad powers to verify compliance with the regulatory scheme in order to protect the integrity of the system against those who would unfairly take advantage of it. To that end, a taxpayer who reports a given amount of income or who claims a deduction must expect that he can be asked to support such claims with documentary proof. The Act spells out a requirement to keep records. Accordingly, the privacy expectations of the taxpayer with respect to these books and records are low. Such an expectation does not increase by reason of the investigation of a tax evasion offence under s. 239.
[47] As stated by Strayer J.A. in Del Zotto (F.C.A.), this type of offence is not criminal in nature for the purposes of s. 8 of the Charter. It is to ensure compliance with the self-reporting mechanisms provided in the Act. This is supported by academic studies which support the position that penalties for tax evasion are a factor in promoting compliance with fiscal laws.
[48] The degree of intrusiveness of the Requirement is the next factor that the respondent addresses. Although the letter requiring production of a document, is a seizure under s. 8 of the Charter, it is not unreasonable. It is, according to Wilson J. in McKinlay, the least intrusive means of monitoring compliance. It does not involve physical presence in the home or business premises of a taxpayer. The respondent points to body searches and inspections of premises as examples of procedures that are more intrusive and require greater scrutiny in light of the provisions of s. 8.
[49] The lack of intrusiveness must be considered in a s. 8 analysis in order for the analysis to be considered a proper one. The investigation of a tax offence under s. 8 or the existence or absence of reasonable and probable grounds are therefore immaterial considerations and therefore do not foreclose the use of less intrusive investigative powers when available.
[50] The respondent cites judicial supervision as another factor to be considered in the s. 8 analysis, noting that, like the subpoenas in Del Zotto (F.C.A.), a requirement letter can be challenged by way of an application for judicial review before the Federal Court (Trial Division).
[51] With respect to vagueness, the respondent submits that the letters themselves were not inherently imprecise or vague. Their meaning is clear when read in conjunction with s. 231.5 of the Act, which allows CCRA to make copies of documents submitted. Since the letter did not specify anything other than originals, it ought to have been understood that originals, not copies, were requested. The letters were therefore not vague and did not therefore violate s. 8 on this basis.
[52] The Minister's amended pleadings emphasized that Faribault was assigned to investigate the returns of the applicants following the completion of an investigation by a colleague into the legitimacy of donations made to at least two registered charities to whom deductible donations were allegedly made by the applicants. SI not only investigates tax evasion offences, but also, like the Audit Division, assesses tax, interest and penalties that taxpayers owe under the ITA.
[53] In preparing its Amended Memorandum of Fact and Law pursuant to the December 2, 2002 order, the applicant replaced its submissions on the question whether the Requirements violated section 8 because they were issued in the course of a tax evasion investigation with submissions on sections 7 and 8 and the predominant purpose of the enquiry.
[54] The submissions made by the Minister on the "predominant purpose" test highlighted in Jarvis and Ling, began by noting that section 7 does not apply to corporations. Corporations cannot enjoy life, liberty or security of the person. The Supreme Court so held in British Columbia Securities Commission v. Branch, [1995] 2 S.C.R. 3. The corporate applicants, that is those other than Sandler and Kligman, can rely only on s. 8.
[55] In Jarvis and Ling, the Supreme Court held that the CCRA can use its requirement powers under s. 231.2 of the ITA up to the point at which the predominant purpose of an inquiry becomes the determination of the penal liability of a taxpayer. The finding of "predominant purpose" is a question of mixed fact and law which must be determined using a contextual approach. Such an approach considers all factors that bear upon the nature of the inquiry.
[56] It is the decision of the C